If you’ve researched federal retirement taxes, you likely know that most of your FERS pension (up to 90%) is taxable, and 50% to 85% of your Social Security benefits can also be taxed. Your traditional TSP contributions are tax-deferred, meaning that all of your withdrawals are fully taxable. However, taxes may apply to other types of retirement income as well.
Here’s a breakdown of taxes on different retirement income sources:
- Qualified Annuities: Since contributions are tax-deferred, you’ll owe federal taxes on all withdrawals.
- Non-Qualified Annuities: Only the earnings part of your withdrawal is taxable since contributions were made with after-tax dollars.
- Interest-Bearing Accounts: Interest income is taxed at regular income rates. (Exception: Interest from municipal bonds is generally exempt from federal income tax and may also be state-tax-free.)
- Dividends (Qualified and Non-Qualified): Qualified dividends are taxed at a lower, long-term capital gains rate, while non-qualified dividends are taxed as ordinary income.
- Traditional IRAs & 401(k)s: Withdrawals are taxed as ordinary income, and if you withdraw before age 59½, you may also pay a penalty.
- Required Minimum Distributions (RMDs): Starting at age 73, you must take RMDs from traditional retirement accounts (such as TSP, 401(k), and 403(b) plans). These distributions are taxed as ordinary income.
- Roth IRAs: Withdrawals are tax-free if you’ve held the account for at least five years and are over 59½. Early withdrawals may incur penalties on earnings.
- Savings Bonds Interest: When bonds mature or are redeemed, interest is taxed at regular income rates.
- Home Sale Gains: If you downsize and sell your primary residence, gains over $250,000 (single filers) or $500,000 (married filers) are taxable.
- State Taxes: Each state has unique rules on taxing retirement income. While some states have no personal income tax, others may tax Social Security and FERS pensions, often with certain exemptions or income thresholds. Check your state’s rules to see what applies. (For more information, see: What You Need to Know About State Taxes on Your Retirement Income.)
Without careful planning, taxes could significantly impact your retirement income. Talking to a Federal Retirement Consultant who understands federal benefits can help you navigate these tax rules.
